Golden Agri - Liquid High Beta Proxy To The Plantation Sector

We expect Golden Agri to post core net earnings growth of above 100% in 2017, coming from a significant recovery in FFB output as well as continued margin improvements in its palm downstream and oilseeds divisions.

Valuations remain undemanding. It is trading at a discount to the regional peer average, and is one of the more sensitive stocks to CPO price movements. Every MYR100/tonne in the CPO price change affects its earnings by 9-11%.

Being one of the highest beta plantation stocks in Singapore would also bode well for it in times of market uncertainty.

Geographically diversified landbank.

We like Golden Agri as we believe its more geographically diversified landbank would allow it to face challenges better in times of extreme weather.

Meanwhile, its integrated operations – which encompass palm downstream operations as well as soybean crushing – could enable it to capture margins all across the industry spectrum.

In addition, its valuation is inexpensive when compared to its peers.

Expect core net profit to more than double in 2017.

Excluding the deferred tax income recognised in FY16, we expect the company to post an admirable >100% YoY jump in core net profit in 2017, on the back of:

A significant recovery in FFB output of 12% YoY (lower than management’s target of 15-20%);

Continued improvement in margins in its palm and laurics division on the back of higher prices and increased cost efficiencies;

More consistent profits at its oilseeds division, given the current higher soybean prices.

Valuations at a discount to its peers.

Our TP of SGD0.46 is based on 18x 2017F earnings and backed by an implied EV/ha of USD12,000/ha, i.e. on the lower end of its regional peers’ USD10,000-20,000/ha. Golden Agri’s current P/E of 15x for 2017F is below its regional peer average of 19x.

Key risks include a reversal in crude palm oil and soybean price trends, weather abnormalities resulting in an oversupply or undersupply of vegetable oils, slower-than-expected implementation of biodiesel mandates and lower- than-expected demand for vegetable oils.

Still a BUY.

We maintain our BUY recommendation on the stock. Golden Agri is highly sensitive to CPO price movements, where every MYR100/tonne change affects its earnings by 9-11% pa.

Golden Agri is also one of Singapore’s highest beta plantation stocks, which would bode well for it in periods of market uncertainty.

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